U.S.-China Trade Wars: Phase 1

“My great friendship with President Xi of China and our country’s relationship with China are both very important to me. Trade between our nations, however, has been very unfair, for a very long time. This situation is no longer sustainable….

“In light of China’s theft of intellectual property and technology and its other unfair trade practices, the United States will implement a 25 percent tariff on $50 billion of goods from China that contain industrially significant technologies. This includes goods related to China’s Made in China 2025 strategic plan to dominate the emerging high-technology industries that will drive future economic growth for China, but hurt economic growth for the United States and many other countries. The United States can no longer tolerate losing our technology and intellectual property through unfair economic practices.”

Trump added that additional tariffs would be pursued should China choose to retaliate in any way.

China issued its own statement on June 16 asserting:

“The U.S. measure violated the relevant rules of the World Trade Organization and is contrary to the consensus reached in the economic and trade negotiations between China and the United States. It seriously violates the legitimate rights and interests of our country and damages the interests of our country and people.

“State Council Customs Tariff Commission issued an announcement with the approval of the State Council, deciding that 659 items originating in the United States should be approximately U.S. $50 billion. Imported goods will be subject to a 25 percent tariff, of which 545 items of about $34 billion U.S. dollars’ worth of goods such as agricultural products, automobiles, and aquatic products will be imposed with tariffs from July 6, 2018, and the implementation time for additional tariffs on other goods will be announced separately.”

The Office of the U.S. Trade Representative released two lists of Chinese imports that will be subject to 25 percent tariffs. The first list contains 818 products with a total import value of approximately $34 billion. These products include engines and motors; construction, drilling and agricultural machinery; machines for working minerals, glass, rubber or plastic; rail locomotives and rolling stock; motor vehicles and motorcycles; helicopters and airplanes; and testing, measuring, and diagnostic instruments and devices, among other items.

The second list of 248 tariff lines covering $16 billion worth of Chinese imports will undergo further public review and comment before final determination of implementation. USTR specified that the lists do not target goods commonly purchased by American consumers, such as cellular phones and televisions.

Companies may request exclusion of a particular product from the additional 25 percent duty. USTR will publish the details of this product exclusion process in a subsequent Federal Register notice.

China’s retaliatory tariffs will take effect on July 6, as well, and be carried out in two phases. In its first list, China will target 545 commodities including agricultural products, autos and aquatic products. A second wave of 114 commodities would include chemicals, medical equipment and energy products.

Immediately after Trump’s announcement, the Chinese Ministry of Commerce said, “The Chinese side does not want fight a trade war” but would respond “strongly” to the “short sightedness” of the U.S. side and that “all the economic and trade achievements previously reached by the two parties will be invalid at the same time.”

In May, progress was made in Washington to persuade China to narrow its trade surplus with the U.S. by buying more agricultural products, natural gas, and other products from the U.S. China also agreed to reduce trade barriers on the import of U.S. autos and some consumer goods. The U.S trade tariffs negated the agreements, said the Chinese Ministry.

How Will This Affect U.S. Businesses and Consumers?

Consumers are not likely to be directly impacted by the tariffs on Chinese goods because the taxes do not focus on items that are bought on a day-to-day basis. Products produced in the U.S. using Chinese imported machinery and inputs will feel the pain. The cost to domestic manufacturers from higher priced Chinese imports will be partly absorbed by producers and retailers and the rest passed on to consumers. How high prices may go will depend on how readily available domestic inputs can be substituted for Chinese imports, and at similar cost. 

“There is very little chance that this three-week delay to July 6 will allow for a last-ditch effort to avert tariffs,” said Michael Hirson, Asia director at Eurasia Group in New York. “A first round of tariffs on $50 billion in goods is locked in and the risk of escalation to a second round is considerable.”

Reaction to Tariffs by Congress

Reaction to the tariffs on Chinese products was mixed among members of the House and Senate. While there was a generally favorable sentiment toward working with China to reduce the trade barriers and narrow China’s trade surplus, some lawmakers were concerned about how it will affect American business, the economy and America’s standing in the world.

“China is our real trade enemy, and their theft of intellectual property and their refusal to let our companies compete fairly threatens millions of future American jobs,” said Senate Minority Leader Chuck Schumer (D-NY). “While we await further details on this trade action, President Trump is right on target.”

Sen. Marco Rubio (R-FL) called the tariffs an “excellent move” and said, “Hitting China with a ‘Theft Tax’ isn’t protectionism; it’s American leadership.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) was concerned about the effect the tariffs may have on U.S. companies and consumers. “China must take responsibility and act expeditiously to change its policies to avoid the damaging effects of tariffs and escalating retaliation,” said Hatch. “America’s trade strategy must focus on combating China’s discriminatory and market-distorting practices. Ill-conceived trade actions that weaken the American economy, alienate allies, and invite retaliation against American businesses, farmers and ranchers, undermine our nation’s ability to successfully confront China’s unfair trade policies.”

Trump, however, was criticized by House Ways & Means Chairman Kevin Brady (R-TX), who acknowledged that China engages in unfair trade practices, but said tariffs would end up harming U.S. companies and consumers. Brady and Hatch instead called for more narrow actions to confront China’s policies.

Ways & Means Committee member Richard Neal (D-MA) saw the Section 301 tariffs as an important tool, but also questioned the administration’s strategy. “I am seriously concerned by the apparent lack of coherence in the administration’s approach thus far with China. Even the best tools, without a plan for how to use them, are useless.”

Industry Comments

“Imposing tariffs places the cost of China’s unfair trade practices squarely on the shoulders of American consumers, manufacturers, farmers and ranchers. This is not the right approach,” said U.S. Chamber of Commerce President and CEO Thomas J. Donohue in a statement.

“For too long, American businesses and workers have suffered devastating losses due to China’s unchecked cheating. These targeted tariffs are the right thing to do for our workers, our economy and our future,” said Scott Paul, president of the Alliance for American Manufacturing (AAM). “While we support the administration’s action today, there is still much left to be done. Restricting Chinese investment, pursuing multilateral trade cases against Beijing, and defending our farmers and workers who may be unfairly targeted by Chinese retaliation must also be priorities.”